Buying an ETF means owning a slice of many companies. Here’s why index changes create huge price shifts.
Sectors & Industries
April 23, 2025
Table of Contents
If you're new to investing, you’ve probably heard the term ETF thrown around a lot. But what exactly is an ETF—and why do so many traders and investors rely on them?
Let’s break it down in simple terms.
An ETF, or Exchange-Traded Fund, is essentially a group of stocks that are bundled together and traded as a single stock. Think of it like a basket—you’re not buying one apple, you’re buying the entire fruit basket, which might include apples, oranges, bananas, and more.
That “basket” can hold anywhere from 10 stocks to over 500, and each one is assigned a specific percentage of the total. For example, in a tech-heavy ETF, you might find it includes:
The ETF itself trades on the stock exchange just like any other stock, so you can buy and sell it throughout the trading day.
One of the most well-known ETFs is SPY, which tracks the S&P 500 index. When you buy SPY, you’re essentially buying a tiny slice of all 500 companies that make up the S&P 500. That means you get instant diversification and exposure to a wide range of industries with a single purchase.
Now, you might be wondering—how is this different from an index fund?
Here’s the key distinction: Indexes, like the S&P 500 or the Nasdaq 100, are not directly tradable. They’re benchmarks—ways to track the performance of a group of stocks. But if you want to invest in an index, you need to buy an ETF that tracks it.
Here’s where things get really interesting—and it’s one of the reasons we track this at LevelFields in our “Added to S&P 500” event scenario.
When a company is added to a major index like the S&P 500, every ETF that tracks that index is required to buy shares of that company. This includes massive funds from Fidelity, BlackRock, and others.
And we’re not talking about a few million dollars—we’re talking billions.
This buying pressure is mechanical. The moment an announcement goes out that a company is being added to the index, fund managers must rebalance their portfolios to include it. That leads to an immediate spike in demand—and often, a short-term increase in the stock price.
It’s not about speculation or sentiment. It’s about forced buying—a simple supply and demand reaction that smart traders watch closely.
Understanding ETFs isn’t just about knowing how to diversify—it’s about recognizing how they shape price movements and market mechanics. Whether you're a long-term investor or short-term trader, knowing how ETFs work—and what happens when a stock joins an index—can help you stay ahead of the curve.
Watch the full video here:
When a stock is added to the S&P 500, every ETF that tracks the index is required to buy shares of that stock. This creates high buying pressure, often causing the stock price to rise.
An S&P 500 ETF is a fund that holds all 500 companies in the index in proportional weights. When you buy it, you’re buying small shares of all those companies in a single trade.
If you invested $1,000 in the S&P 500 ETF (like SPY or VOO) 10 years ago, your investment would likely have more than doubled—depending on exact timing, returns would be around 10–12% annually on average.
Yes, for many investors. S&P 500 ETFs offer instant diversification, low fees, and exposure to top U.S. companies, making them ideal for long-term investing.
While diversified, S&P 500 ETFs are still subject to market risk. If the overall market declines, so will the ETF. It’s not immune to volatility.
ETFs can be a solid long-term holding for many investors. They offer liquidity, diversification, and low fees. But it depends on your financial goals and time horizon.
If a company within the ETF fails, its share of the ETF is removed and replaced according to the index rules. The ETF itself remains stable due to its broad diversification.
ETFs are best suited for long-term investing—ideally 5 years or more. This allows time to recover from short-term market swings and compound returns.
ETFs still carry market risk, may underperform actively managed funds in some periods, and can be too broad if you're looking for targeted exposure. Also, during market crashes, all stocks tend to drop—including those in ETFs.
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